Conventional Mortgage Loan Program
Borrowers in the United States that obtain loans might be familiar with the Conventional Mortgage Loan Program. Conventional is a very popular type of mortgage financing due to their accessibility.
In general, about 60% of U.S. homebuyers use a conventional loan when purchasing or refinancing a home. According to the National Association of Realtors, 88% of home buyers financed their home purchase in 2019.
So, what does having a conforming conventional mortgage really mean?
In short, a conforming conventional mortgage refers to a loan that is within the conforming limit dollar cap, based on the corresponding residential property type (i.e. 1-4-unit dwellings), and is eligible for sale to Fannie Mae or Freddie Mac.
Conforming limits can be adjusted on an annual basis, usually from October of the current year to October for the next year. The national conforming limit for a 1-unit dwelling in 2020 generally changes every year.
MortgageQuote.com specializes in helping borrowers obtain conforming conventional mortgage financing.
Here is a brief overview of where conforming conventional mortgages came from, as well as some things you might want to consider before choosing a conventional loan for your next purchase or refinance.
Conforming Conventional Mortgage Loan Program Limits
Conforming limits have been around for some time. Since the enactment of the Housing and Economic Recovery Act of 2008, the Federal Housing and Finance Agency (FHFA) has been in charge of monitoring and adjusting the national conforming criteria.
Between the period of 2006-2016, the conforming limits set by the FHFA never really changed. However, since 2016 the limit has increased by roughly $93,400.
The limits are weighted heavily on median home values across the nation. These values, in general, increased in 2019, especially in high-cost areas. This has driven up the maximum amount while simultaneously increasing the baseline, resulting in new ceilings.
Conforming Conventional Mortgage Loan Program
There are a lot of conforming conventional options available to borrowers looking to purchase a new home or refinance an existing mortgage.
You can choose from a variety of fixed rate or adjustable rate options. Borrowers also have the flexibility to choose a term that aligns with their overarching financing goals. If you are looking to pay off your debt faster, you may want to consider a lower term.
Keep in mind, in general, with a longer term you have more time to repay your loan, meaning your payments may be lower compared to a shorter repayment term.
Mortgage insurance may also be required for certain transactions, but is cancellable once there is enough equity generated within the home.
If costs are also a concern, you may have the option to roll some of those into the debt itself, minimizing your out of pocket expense.
Want to learn more about conforming conventional programs? MortgageQuote can answer all your conforming conventional mortgage program related questions. We help clients obtain mortgages for conventional loans throughout Florida.
If you are interested in knowing what the difference and similarities between conforming and conventional mortgages are then review our article on Conforming vs Conventional.
Unraveling the Mystery of Conventional Mortgages: How They Differ from Other Loan Options
Are you considering buying a home or refinancing your existing mortgage? If so, you've probably come across the term "conventional mortgage." But what exactly does it mean, and how does it differ from other loan options? In this article, we will unravel the mystery of conventional mortgages and help you understand their unique features.
Unlike government-backed loans such as FHA or VA loans, conventional mortgages are not insured or guaranteed by any government entity. This means that the lender takes on more risk, but borrowers with strong credit and financial stability can often benefit from lower interest rates and more flexibility in terms.
Conventional mortgages also differ from alternative loan options like adjustable-rate mortgages (ARMs) or jumbo loans. While ARMs offer an initial low interest rate that adjusts over time, conventional mortgages provide a fixed interest rate throughout the loan term, offering stability and predictability.
Understanding the ins and outs of conventional mortgages is crucial when navigating the home buying or refinancing process. So, join us as we delve into the world of conventional mortgages and shed light on this popular loan option.
Understanding the types of mortgages available
When it comes to financing a home purchase or refinancing a mortgage, there are various types of loans available. Each type has its own set of features and eligibility requirements. Conventional mortgages are one of the most common and popular loan options.
Conventional mortgages, as the name suggests, are not insured or guaranteed by any government entity. This means that the lender takes on more risk compared to government-backed loans such as FHA or VA loans. However, borrowers with strong credit and financial stability can often benefit from lower interest rates and more flexibility in terms.
Conventional mortgages can be further classified into two categories: conforming and non-conforming loans. Conforming loans adhere to the guidelines set by Fannie Mae and Freddie Mac, the two government-sponsored enterprises that buy and sell mortgages. Non-conforming loans, on the other hand, do not meet these guidelines and may have higher interest rates and stricter qualification criteria.
Key differences between conventional mortgages and government-backed loans
One of the key differences between conventional mortgages and government-backed loans is the source of insurance or guarantee. With conventional mortgages, the lender takes on the full risk of the loan. In contrast, government-backed loans such as FHA or VA loans are insured or guaranteed by the government, which means that the lender is protected against default.
Another significant difference is the down payment requirement. Conventional mortgages typically require a higher down payment compared to government-backed loans. For example, FHA loans may only require a down payment as low as 3.5% of the purchase price, while conventional mortgages may require 5% or more.
Additionally, conventional mortgages have stricter credit score and debt-to-income ratio requirements compared to government-backed loans. Borrowers with lower credit scores or higher debt-to-income ratios may find it more challenging to qualify for a conventional mortgage.
Advantages of choosing a conventional mortgage
Despite the higher down payment and stricter qualification criteria, there are several advantages to choosing a conventional mortgage.
Firstly, conventional mortgages often offer lower interest rates compared to government-backed loans. This is because the lender takes on more risk, and borrowers with strong credit profiles are rewarded with better rates.
Secondly, conventional mortgages provide more flexibility in terms. Borrowers can choose from various loan terms, such as 15-year or 30-year fixed-rate mortgages. This allows borrowers to customize their loan to fit their financial goals and budget.
Lastly, conventional mortgages do not require upfront mortgage insurance premiums like FHA loans do. This can save borrowers a significant amount of money over the life of the loan.
Disadvantages of conventional mortgages compared to other loan options
While conventional mortgages have their advantages, they also have some disadvantages compared to other loan options.
One of the main disadvantages is the higher down payment requirement. Saving up for a larger down payment can be challenging, especially for first-time homebuyers. Government-backed loans, such as FHA loans, offer lower down payment options, making homeownership more accessible for some borrowers.
Another disadvantage is the stricter qualification criteria. Conventional mortgages typically require higher credit scores and lower debt-to-income ratios compared to government-backed loans. This can make it more difficult for borrowers with less-than-perfect credit or higher levels of debt to qualify for a conventional mortgage.
Lastly, conventional mortgages may have stricter appraisal requirements. The property being financed must meet certain standards and be appraised at or above the purchase price. This can pose challenges if the property does not meet these requirements or if the appraisal falls short of the purchase price.
Qualifying for a conventional mortgage
To qualify for a conventional mortgage, borrowers must meet certain eligibility requirements. These requirements typically include a minimum credit score, a stable employment history, and a low debt-to-income ratio.
The minimum credit score required for a conventional mortgage varies depending on the lender and the loan program. However, most lenders prefer a credit score of at least 620. Borrowers with higher credit scores may be eligible for better interest rates and more favorable loan terms.
In addition to the credit score, lenders also consider the borrower's employment history. Stable employment, preferably with the same employer for at least two years, is generally preferred. Lenders want to see that the borrower has a steady source of income to ensure they can make their mortgage payments.
Furthermore, lenders calculate the borrower's debt-to-income ratio (DTI) to assess their ability to repay the loan. The DTI compares the borrower's monthly debt obligations to their gross monthly income. Most lenders prefer a DTI of 43% or lower, although some may be more flexible depending on other factors.
How interest rates are determined for conventional mortgages
Interest rates for conventional mortgages are influenced by various factors, including the borrower's credit score, loan-to-value ratio (LTV), loan term, and market conditions.
Credit score plays a significant role in determining the interest rate. Borrowers with higher credit scores are considered less risky and may qualify for lower interest rates. On the other hand, borrowers with lower credit scores may face higher interest rates or may need to pay additional points to secure a lower rate.
The loan-to-value ratio, which is the ratio of the loan amount to the appraised value of the property, also affects the interest rate. A lower LTV ratio indicates less risk for the lender and may result in a lower interest rate.
The loan term, whether it's a 15-year or 30-year mortgage, can also impact the interest rate. Generally, shorter-term loans have lower interest rates compared to longer-term loans.
Lastly, market conditions, including inflation rates and the overall state of the economy, can influence interest rates. Lenders adjust their rates based on these market factors to ensure they remain competitive while managing their risk.
The role of private mortgage insurance (PMI) in conventional mortgages
Private Mortgage Insurance (PMI) is a requirement for conventional mortgages with a loan-to-value ratio higher than 80%. PMI protects the lender in case the borrower defaults on the loan.
PMI is typically added to the borrower's monthly mortgage payment and can vary depending on factors such as the loan amount, credit score, and LTV ratio. Once the loan-to-value ratio reaches 78%, the borrower may request to have the PMI removed.
It's important to note that PMI is not the same as homeowner's insurance. Homeowner's insurance protects the borrower and the lender from property damage or loss, while PMI specifically covers the lender's risk in case of default.
Tips for choosing the right mortgage option for your needs
Choosing the right mortgage option is a crucial decision that can have a significant impact on your financial future. Here are a few tips to help you make an informed choice:
1. Evaluate your financial situation: Consider your credit score, income stability, and debt levels. This will give you a better idea of the loan options you are likely to qualify for.
2. Compare interest rates and loan terms: Shop around and compare interest rates and loan terms from different lenders. This will help you find the best deal that suits your needs and budget.
3. Assess your long-term goals: Consider your long-term goals and how each loan option aligns with them. For example, if you plan to stay in your home for a long time, a fixed-rate mortgage may be a better choice than an adjustable-rate mortgage.
4. Consult with a mortgage professional: Seek guidance from a mortgage professional who can provide personalized advice based on your unique financial situation and goals. They can help you navigate the complex mortgage landscape and make an informed decision.
Conclusion
In conclusion, conventional mortgages offer borrowers with strong credit profiles and financial stability an attractive option for financing a home purchase or refinancing an existing mortgage. While they may have higher down payment requirements and stricter qualification criteria compared to government-backed loans, they often come with lower interest rates and more flexibility in terms.
Understanding the differences between conventional mortgages and other loan options is essential when making a decision that aligns with your financial goals. By considering factors such as credit score, down payment, and loan term, you can choose the mortgage option that best suits your needs. Remember to consult with a mortgage professional who can guide you through the process and help you make an informed choice.